Personal finance mastery with a pinch of motivation.

My Experiment With Paying Cash

My wife and I have used debit cards for at least the length of our marriage (11+ years and counting). They are more convenient than cash, less dirty than cash and you can carry thousands of dollars on one without loading up your wallet with thousands of dollars of cash. However, after all of those advantages I will list several reasons why you spend more money with debit or credit cards. The purpose of this article is not to merely give advice on reducing your credit card spending, but also to even eliminate debit card spending. This article will show you how you can change your mindset of how you spend money.

he ignores the deluge of loyalty-point offers from banks and credit card companies

I’ll expand my thoughts on each of those items as well as add some more of my own.

First, paying with cash is more painful than swiping a card. During my experiment the last couple months of paying cash for items that allow it (my fixed bills and utilities do not have any benefit of getting paid with cash) I learned firsthand how painful cash can be to use exclusively. A couple days ago I went to a discount grocery store that only takes cash or checks. I forgot my checkbook and did not want to go back to the house. So I withdrew money from the in-store ATM (fee-free surprisingly) and that fixed amount was my budget for this grocery trip. I knew that if I exceeded the amount of cash in my wallet I would embarrassingly have to tell the cashier to skip some items while at the checkout in front of everyone. Having this fixed amount also disciplined me to resist the temptation to buy foods that I don’t need including junk food and convenience foods. If this store accepted credit/debit cards what discipline would I (or any spender in that store) have to stop me from spending 110%, 120% or more than I planned on spending? None.

Second, if you don’t use the card you won’t get a bill. I cannot tell you how many times in the past my wife and I did not clearly communicate to each other our spending on the credit card bill for the month and then WHAM-O we get socked with a much bigger bill than we planned. That would be exactly the reason why banks that offer credit cards often turn into billion-dollar behemoths in a short period of time. They’re collecting all of that massive interest from debt-holders. Sheryl Harris, a consumer advocate columnist details some fascinating facts about the history and current state of consumer credit in the U.S.:

Decades ago, credit was seen as something to be used cautiously. One might borrow to buy a home or a car or in a dire emergency, but lenders and borrowers alike shared the belief that credit was to be doled out sparingly.

In the 1960s, Household Finance’s ads included the caution to never borrow needlessly.

Banks turned away would-be homeowners who couldn’t amass a sizable down payment and show they could devote a chunk of their income to the serious business of paying off a mortgage – both principal and interest.

Credit-card issuers generously funded credit counseling programs to help borrowers who slipped up learn how to budget. If wayward debtors joined a financial counseling program, lenders routinely would lower the interest owed to help them get back on track.

Those days are history.

Tweens – kids 11 to 13 – are pitched secured cards to help them get in the habit of using plastic early. College kids are handed applications for credit cards before they even step on campus. People emerge from bankruptcy court to find new offers of credit waiting in their mailboxes.

Creditworthiness has become a state of mind. No down payment? No real disposable income? No worries.

Between 2000 and 2005, among households that use plastic, the average credit card debt went up 17 percent to $9,159 per family.

Yes, you read that correctly. $9,159 of credit card debt per family. At 17% interest paid back over two years, you’d pay back $1709 in interest. Or put another way, you just bought one of the credit card managers in that bank a cruise in the Caribbean for a week! How do avoid becoming one of those families with $9K in credit card debt? Don’t use the card. That is certainly easier said than done, but some useful steps are here in the How To Avoid Using Credit Cards article.

He ignores the deluge of loyalty-point offers from banks and credit card companies. I heard a caller on the Dave Ramsey radio show the other day fiercely debating Dave on how the caller is taking the credit card companies to task. He says he puts everything on his credit cards and pays them off each month. Dave’s rebuttal points were:

Studies have shown that consumers spend 12 – 18% more when using plastic (both debit and credit). How is this guy coming out ahead if he is spending more 12 – 18% money just to get some loyalty points? He’d have to buy everything on sale at 12 – 18% off just to break even!

Does the caller actually believe he can beat multi-billion-dollar credit card companies at their own game? The banks plow millions of dollars each year each year into television, radio and print advertising in an effort to alter consumer behavior. “Come on, you deserve than trip to Vegas. Tough day at work? Go buy yourself those new $500 golf clubs? Need some home improvements but don’t have the money? Put it on your new Home Depot card and get 10% off your first purchase.”

As I detailed in paragraphs above, Dave reminded the caller that paying with cash is inconvenient and therefore you spend less.

The caller was bullheaded and probably was not convinced by Dave, but millions of his listeners including me certainly were influenced by that call.

Another intangible benefit I received from paying with cash for items is the satisfaction of saving up for something. How many parents teach their children about spending by saying “here’s ten dollars for that new toy. You can pay me back over 12 months by doing your chores around the house for nothing!” No, you teach a child proper spending habits by making the child save up for that big-ticket item (big-ticket to them). If a child receives a toy by doing nothing he or she won’t fully appreciate that toy. If the kid needs to spend two months saving for it, you can bet she will take great care of that toy and play with it often. The exact same holds true for adults. Eliminating the “have to have it now” attitude makes us savor and enjoy the big purchase once the big day finally arrives.

If you give yourself several months to change your mindset about using cash versus plastic eventually the seeds will sink into your subconscious mind to save up for items rather than make impulse buys. You can’t put a value on the personal satisfaction of paying with cash as well as your savings in interest from credit card use.